Colonial BancGroup, FDIC Square Off In Bankruptcy Dispute

The former parent company of Colonial Bank, which was seized by federal regulators last year, is battling with the Federal Deposit Insurance Corp. over the agency's $1 billion bankruptcy claim, the latest dispute between the agency and bank-holding companies.

The FDIC says the bank's former parent owes it more than $1 billion, an amount equal to the gap between how much capital its banking subsidiary was required to have and what it actually had on hand when it was seized by regulators.

The FDIC, the federal agency charged with managing the receiverships of failed banking institutions, says Colonial's holding company in recent years made numerous commitments to regulators to shore up the bank's capital. It's now going after the bank's parent for those funds, claiming it's entitled to immediate payment under the law.

Colonial BancGroup Inc., the failed thrift's corporate parent, said in bankruptcy court papers filed this week that it believes the FDIC's position is "without merit," but if successful, the holding company will be forced to liquidate.

The result, according to Colonial's lawyers, is that the FDIC will "reap the remaining benefits of the estate," leaving other creditors owed some $400 million out of the money.

The FDIC was named receiver of Colonial Bank after regulators seized the Montgomery, Ala., bank in the summer of 2009. Colonial, which had $25 billion in assets and $20 billion in deposits, was the biggest bank failure of last year.

Judge Dwight H. Williams Jr. of the U.S. Bankruptcy Court in Montgomery has scheduled a hearing on the dispute for May 26.

The FDIC and Colonial BancGroup declined to comment on the dispute.

However, the FDIC's fight with Colonial mirrors a dispute between the agency and the parent of Cleveland's failed AmTrust Bank, which regulators seized late last year.

In that case, the FDIC says AmTrust Financial Corp. owes it at least $518.6 million, and resolving the dispute is of "critical importance" to the nation's taxpayers.

"The resolution of this case is of critical importance to the FDIC and the taxpayers of the United States because the proceedings directly involve the FDIC's authority and obligation to hold bank holding companies accountable for the commitments they make to regulators to maintain the capital of the banks they own and control," lawyers for the FDIC said in filings in AmTrust's bankruptcy case.

The bank seizures represent just two of some 140 banks regulators closed in 2009. The FDIC sold Colonial Bank's assets to BB&T Corp. and AmTrust's assets to New York Community Bancorp Inc.

The fight between Colonial BancGroup and the FDIC over capital commitments is just one of the disputes between the holding company and the regulator. The holding company has sued the FDIC over the rights to a number of assets — including tax refunds, proceeds from insurance policies and other property — that it says belong to the bankruptcy estate. The FDIC claims it has dibs on the assets.

At issue are assets that the parent company said it transferred to the bank while it was insolvent. Such transfers, which could be worth hundreds of millions of dollars, can sometimes be unwound under bankruptcy law.

Alabama banking authorities closed Colonial Bank in August 2009 after its parent failed to raise the funds needed to keep it afloat. The company had suffered losses related to its commercial real-estate lending.

Parent company Colonial BancGroup filed for bankruptcy protection later that month. Colonial's bankruptcy came amid problems at collapsed Florida mortgage lender Taylor Bean & Whitaker Mortgage Corp. The two companies had a close relationship.

Taylor Bean and a group of other investors had sought to pump $300 million into Colonial, which would have enabled Colonial to become eligible for a $550 million federal bailout. But the two sides failed to get regulatory approvals, and the plan was scuttled.

Colonial has acknowledged it was the target of a criminal probe by the Department of Justice in relation to its mortgage warehouse-lending division and alleged accounting irregularities.